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Abstract

Financial Crisis and Governmental Behaviour in South Korea.

The theme of this thesis is whether Korean governmental behaviour can explain why the financial crisis occurred or if other involved parties behaviour as the chaebols or foreign investors give a better understanding of what happened during the financial turmoil in East Asia.

The thesis assesses three main conceptions of the financial crisis that took place in South Korea during 1997 and discusses to which extent they are useful in the analysis of the financial crisis. The three approaches are labelled ‘governmental behaviour’, ‘developmental state’, and ‘corporate society’. The governmental behaviour approach emphasises the characteristic connection between government and chaebols and how such connection is a recipe for moral hazard. According to this approach it was the presence of moral hazard and an extreme gearing in the industry that had to result in a sudden run among foreign investors. The developmental behaviour approach focuses more on the liberalisation that took place in South Korea after 1990 and especially during the presidency of Kim Young Sam. The indebted business and its connection to the government had worked fine for decades before the liberalisation. The business was relatively invulnerable as long as the country’s capital account was properly regulated. The corporate society approach assert that the government’s attempts to undertake necessary reforms was manipulated by the chaebols and hence the shortcomings in the Korean economy culminated in the crisis.

All three approaches sketch plausible scenarios prior and during the crisis. However, the approaches’ assertions are not always unambiguously verified empirically and the reason can be lack of transparency which is one of the objections to the Korean economy. Public data has been defective or not reliable and the chaebols’ financial statements has been likewise.

The thesis are not more controversial than to suggest that the financial crisis had a multi-faceted background and that all three approaches pinpoint crucial obstacles and pitfalls a government has to avoid to successfully undertake reforms in an economy. What all approaches agrees is that the Korean government did not undertake reforms in a proper manner and hence much of the problems Korea faced during the crisis stems form suboptimal implementation of reforms.

The motivation for discussing the financial crisis in South Korea is to better understand underlying reasons why financial crises occurs. Theoretical conceptualisation of the financial crisis in South Korea, in addition to other discussions of financial crises gives an orientation to underdeveloped and new industrialised counties how to avoid or minimise financial crisis during their economic development. However, a sad observation in this debate is that discussions are not always very pragmatic, but rather characterised by trench argumentation.

In the conclusion it is argued that the governmental state approach and parts of the developmental state approach, especially represented by Ha-joon Chang, have the strongest explanatory power. It has been harder to empirically prove that chaebols were able to manipulate reforms initiated by the government. The governmental behaviour approach was also the approach that was most critical to the South Korean economic development prior the financial crisis. Their objection were the connection between the government and the chaebols, lack of transparency, and the government’s credit policy artificially stimulating non-viable firms.